Traders Think Even a Narrow Win Will Boost Pound

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The pound could be set for a further rally if U.K. Prime Minister Theresa May dodges defeat in a confidence vote Wednesday, though a victory won’t end turmoil for the currency.

With sterling already climbing after the BBC reported May will get backing from enough Conservative Party lawmakers to see off the rebellion, traders believe even a narrow win is sufficient to give the beleaguered currency a reprieve. Yet investors still have to contend with a multitude of risks, including a vote on her Brexit deal or the prospect of another election and a second referendum.

Here’s what banks see in store for the pound:

Nomura International Plc (Expects 1-3% swing)

• Sterling could drop 3 percent on a trade-weighted basis within days if May loses the vote of confidence, and should climb 1 to 2 percent if she survives, according to strategist Jordan Rochester.
• “The next 12 hours will be headline driven. If loyalists start a narrative about how we need a new direction, then that is very negative.”

JPMorgan Chase & Co. (Base case is Brexit deal accepted)

• The pound could eventually fall by 5 percent to 10 percent on a trade-weighted basis on capital flight should May lose the confidence vote and a hard Brexiteer takes over her position as Prime Minister, said John Normand, head of cross-asset strategy.
• “From there, the focus will be around potential capital flight or long term hedging as opposed to the liquidation of investor positions by traditional asset managers or hedge funds.”
• Normand said the bank’s base case is acceptance of May’s Brexit deal over the next few months, but confidence in this forecast is low.

Danske Bank A/S (Pound to hold $1.23)

• A technical support level for the pound at $1.2310 should hold even if May loses the vote, said senior analyst Morten Helt.
• “It looks like a strong technical level, and even though Brexit uncertainty will increase if she loses the vote, all options are still on the table. This should reduce damage to pound near term.”
• The likelihood of a new referendum also increases with the scenario of May losing the leadership challenge, which would support the pound.

Rabobank (Sees limited rally unless big vote win)

• The reaction in the pound today shows some investors are hoping Brexit may be delayed while the Conservatives elect a new leader, said head of currency strategy Jane Foley.
• If May wins this vote, “and I still think there’s a good chance she may win”, expect to see a rally in sterling but it will be limited by ongoing uncertainty.
• Even if the Prime Minister wins by a very slim majority, she is unlikely to resign, added Foley.
• However, the pound will rally more the bigger the majority for May, as “the market will probably assume that if she wins by a large margin she has a greater chance of getting her deal through parliament.”

Toronto-Dominion Bank (Margin of win doesn’t matter)

• The margin by which May wins the confidence vote doesn’t matter, said Ned Rumpeltin, head of foreign-exchange strategy.
• “A win’s a win. More votes the better, but this is going to very, very messy.”

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